I am the Managing Director of MarketWatch Centre for Negotiation Ltd., an associate professor at BMI, CBS-SIMI, former chairman of the Centre for Negotiation at Copenhagen Business School and a speaker and consultant. I’ve written 23 books on the topics of negotiation and business communication and contributed to many mainstream and trade news publications such as the Christian Science Monitor, Inside Supply Management, BusinessWeek.com, IndustryWeek.com, and BusinessInsider.com, among others. Throughout my career, I’ve had the privilege of working with world-class organizations such as Discovery Channel, Microsoft, Canon, Novo Nordisk, ThermoFisher, Rolls-Royce, IKEA, various governments, Unicef, SABMiller and PricewaterhouseCoopers. I am adjunct faculty at Thunderbird University. In 2015 I was nominated among the 100 Top Thought Leaders in Trust globally.

To Hell With Shareholder Value

Shareholder value: It’s been called the driving force of 21st-century business. It’s also been labeled “the dumbest idea in the world” by legendary chief executive Jack Welch, former CEO of General Electric. Welch was able to dramatically increase revenue and shareholder value during his tenure, but GE’s extraordinary accomplishments were not the result of a single-minded focus on beating quarterly profits. Maximizing returns is an outcome, not a strategy.

What value do shareholders bring to the companies they invest in? Are most shareholders interested in what is best for the company, or are they in it only for the financial performance of the company’s shares?

Adam Smith, the founder of capitalism, said that everyone should do what is best for themself. However, Professor Nash, portrayed in the movie A Beautiful Mind starring Russell Crowe, stated that “Adam Smith was wrong!” Commercial organizations can only succeed if everybody is doing what is best for themself while simultaneously doing what’s best for the whole group.

Beginning in the 1990s, we witnessed extreme egocentric behavior among public companies who were motivated solely by their own financial gains. Several studies prove that self-centered and egocentric companies perform poorly as compared to companies who focus on developing innovative products, delivering value for the customer, and motivating their employees to be more productive and successful. How can these companies deliver value to their customers or suppliers if they are only looking at their own bottom line? Too much focus on shareholder value, measured by quarterly reports, is one of the primary reasons that public companies are not realizing their full potential and that the West has been in financial chaos for the past six years. Companies that outperform the rest – over time – build their success on a performance-based culture, driven from the outside in.

Most executives agree that it’s important to create value for the customer. The problem is that despite the good intentions of the senior management team, this mindset often doesn’t travel farther than the company core values posted in the reception lobby of the corporate headquarters. You know the classic four: honesty, engagement, customer focus, and collaboration. If you exchanged one company’s value statement for the values posted in the lobby of the corporate headquarters across the street, would anyone notice? Or are the values posted in the lobby of the neighboring company the same four?

Professor Solow, winner of the Nobel Prize for his theory on economic growth, found that only a portion of financial growth in the world comes from companies making money out of money. Instead, the majority of financial growth comes from companies actually producing a product, developing a new service, or changing the way we conduct business. Corporate leaders need to do more than shuffle numbers on a balance sheet. Consider Steve Job’s unrelenting focus on product innovation and what Apple was able to achieve by creating the iPad, iPhone, and iPod. As we know, iTunes has literally changed the entire music industry!

The obsession with maximizing shareholder value has also impacted the way that companies approach negotiations with their customers and suppliers. When organizations are working in SMARTnership™ with their strategic partners, new opportunities show themselves and additional value is discovered in the transaction. I call this NegoEconomics™. My firm’s research indicates that companies are able to increase their potential gains by as much as 42% by building trust, sharing important information, leveraging the differences between the parties, and collaborating to reduce risk and better distribute resources. NegoEconomics works only if corporate executives drive the culture of the organization so that negotiations are conducted in a fair and open environment, allowing trust to emerge. To discover this added value buried in the transaction, the negotiators must change from an “us versus them” approach to an attitude of SMARTnership.

To solve the world’s economic crisis, we need brave CEOs and leaders to step up and declare, “I don’t care what the share value will be for the next two years. We might not make a profit during this period. But we are going to focus all our resources on product research and development with the goal to create the best product the world has ever seen. We’re here to change the world! We are fully committed to delivering value and a return on investment to our shareholders. Yet it may not be in the next 30 days or even the next three quarters. I am asking our investors to look at us with a long-term view. I am asking them to stand by us and risk a much larger return on their investment if they will agree to fund the innovation required to develop a market-changing product.”

If you left Sharpies under the statement of core values that hangs in the lobby of your company, what kind of graffiti would you find scribbled on your values statement? What would your customers and suppliers write? Your corporate values are better articulated by your employees, customers, and strategic partners than by your management team and board of directors. If there is a disconnect between your formal statement of values and the graffiti, you have work to do.

If you can build a product that will truly change the world, like Steve Jobs did several times, your shareholder value will take care of itself. Your problems will be protecting your distribution channels, defending your intellectual property, and retaining your talent. Which set of problems would you prefer? I think the answer is obvious – to hell with shareholder value.

Thank you for engaging with me on this article! Please let me know your thoughts, questions, or feedback by leaving me a comment below. I will do my best to respond to everyone.

Also, there are many other ways to connect with me. Follow me on Twitter, like me on Facebook, or visit www.KeldJensen.com and sign up for my newsletter “Finding SMARTnership.” I look forward to continuing the conversation with all of you.

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Blindly driving for shareholder value is indeed counterproductive but perhaps paradoxically shareholder value is the ultimate financial metric. Strategies and options CAN and should be tested using shareholder value for the metric if you have a solid model for doing that. Performance metrics do matter and shareholder value is the best. Quarterly earnings are not a particularly good metric. As the author says, innovation is superior to chasing earnings.